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It's also the iPod Touch. I don't know why everyone seems to be overlooking this.

They play the EXACT SAME games. No phone service required. And they start at $199.

Most people who do buy an iPhone/iTouch are either looking directly at the AppStore (it's really why I bought one over a Blackberry) or they're simply buying out of brand recognition and popular trends.

Marketing is by far the biggest hurdle as an AppStore developer. If you don't market, it is way too easy to get buried under the tens of thousands of apps currently available. This is easily the weakest point of the AppStore.